Monday, 29 September 2014

Or, you levy LVT on their landlords and scrap all the awful things like VAT, CT NI Withholding Tax etc. etc. and therefore any need for double taxation agreements and off we go to the races.

I was thinking about that recently and it's not that simple.

In UK domestic terms, that's the best thing we could possibly do, but having a zero % corporation tax rate is not necessarily of interest to foreign investors.

This is because foreign countries have two ways of dealing with profits from UK-based subsidiaries in the hands of holding companies based in their country:

1. Some of them simply exempt profits earned by subsidiaries in non-tax haven countries which are then paid to the holding company as dividends.

2. Others tax those dividends again, but give a credit for UK corporation tax paid. So if the corporation tax rate in the other country is 20% or higher, the UK corporation tax is not a net cost.

Basically, any country which charges much less than 20% is probably on the tax haven/CFC/naughty list and gets looked at very closely. But companies don't get any sort of credit for LVT (i.e. Business Rates) paid in the UK.

So, it would make the UK relatively more attractive (for a given amount of tax revenue) if businesses (whether tenant or not) continued to pay the higher of
a) 20% corporation tax and
b) the LVT on its premises,
but the total tax would be expressed as a % of that businesses' earnings. Or they are charged 20% with a full reduction for any LVT already paid.

So if Starbucks has £50 million UK profits and an LVT bill of £15 million, its profits are taxed at nominal 30% (with credit for LVT already paid; net corporation tax £nil); if its LVT bill is £5 million, its profits are taxed at flat 20% (with credit for LVT already paid, so another £5 million UK corp tax to pay).

Or something like that.

Now, these businesses and their tax advisors aren't stupid, they know that their sweet spot is to declare UK taxable profits which are equal to their UK LVT bill x 5; there's no incentive to declare anything more or less than that.

In other words, in reality, the business is paying LVT in the UK (for which it would not get a credit abroad) but to the outside world, the company is paying UK corporation tax at around 20%, (for which it gets a credit against foreign tax, or which means that the other country treats dividends from the UK as tax exempt in their country).

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comments:

Indeed. But, if you have a benign tax regime where rents are taxed (rent being the ultimate tax on non Wealth creating consumption) IMHO you will see stacks of inward investment as all sorts of genuine Wealth creating businesses (e.g. Widget makers) who don't really want own their buildings migrate here.